Category Archives: international schools services

A nonprofit company should generally maintain a solid boundary between its activities and those of a related for profit company. A recent decision of the New Jersey Supreme Court highlighted why this is so important.

In that case, the Court held that nonprofit companies could lose their property tax exemptions if they commingle their affairs with affiliated entities that operate for profit. International Schools Services v. West Windsor Township, 207 N.J. 3 (N.J. 2011).

The plaintiff, International Schools Services, Inc. (ISS), was a nonprofit corporation that ensured that American children living overseas receive a quality education. In 1999, ISS created Independent Schools Group, Inc. (ISG), a for profit corporation that provided insurance and investment services to the educational community abroad. In 2002, ISS created ISS Financial and Insurance Network Inc. (ISSFIN), a for profit corporation that provided insurance services to ISS clients. The headquarters of both ISG and ISSFIN was located on ISS-owned property in West Windsor, New Jersey. Both ISG and ISSFIN paid below-market rates for their lease of the office space and ISS issued an unsecured loan to ISG. Additionally, ISS’ president was a member of the board of directors for both for profit entities.

West Windsor granted ISS a property tax exemption from 1990 through 2001 under New Jersey Statute 54:4-3.6. However, after reviewing the entity’s activities, the town revoked the exemption based on ISS’ close relationship with ISG and ISSFIN. The Tax Court rejected the plaintiff’s appeal and the Appellate Division partially agreed.

In 1984, the New Jersey Supreme Court set out three criteria for a nonprofit corporation to meet in order to secure a tax exemption for its real property:

It must be organized exclusively for the moral and mental improvement of men, women and children.

Its property must be actually and exclusively used for the tax-exempt purpose.

Its operation and use of its property must not be conducted for profit.

The Legislature has since amended the second prong of the test, removing the requirement of exclusivity and instead permitting an exemption for property that is “actually used” in connection with tax-exempt functions. The Court considered this change and asked “whether the Legislature’s elimination of the exclusivity requirement allows a nonprofit entity to conduct for profit activities in a commingled fashion on its owned and occupied property.” International Schools Services at 6.

The Court determined that the Legislature did not intend for such a result, because doing so would allow a nonprofit entity “to claim a property tax exemption when it has become inseparably entangled with for profit entities” and thus “would allow indirect taxpayer subsidization of those entities.” Id.at 42. The Court upheld West Windsor’s denial of the tax exemption “because the commingling of effort and entanglement of activities and operations by ISS and its profit-making affiliates was significant and substantial, with the benefit in the form of direct and indirect subsidies flowing only one way – from ISS to the for profit entities.” Id.at 4.

This decision is important for nonprofit companies that have close corporate relations with for profit companies that might jeopardize their ability to receive tax exemptions. It suggests that allowing a nonprofit entity to get too close – financially or otherwise – with a for profit entity could leave the nonprofit without the tax exemptions they value so greatly.

Small Business[MUSIC PLAYING] We enjoy representing entrepreneurs. I started this law firm over a decade ago. And the truth is that I enjoy representing entrepreneurs because I identify with them. And so, when someone comes to me and they want to start a business. They are speaking about becoming an entrepreneur, I take it really seriously. And I listen to their story. And I'm really interested in what their plan is and how it's going to work. It's just beginning. And in that state, it needs something of, I guess, tender loving care by its accountant, by its insurance agent, and by its lawyer. While we certainly represent a significant number of large multinational companies and handle their legal issues, we also have a strong core of clients who fall under the category of start-ups and small to medium size businesses. In a lot of respects, this is a very fulfilling and unique client representation. Many of these companies are not quite of a stature that they have their own in house legal department, so we really serve as their general counsel. They're calling us for their day to day legal matters, as well as the unique ones. So what that means is that we're dealing with everything from their corporate governance issues, attending board meetings, dealing with their employment contracts, intellectual property, customer contracts, and everything that really comes up in the day to day operation of their business, as well as the big deals and transactions, as well as the litigation matters that they face. Another interesting aspect to this is whether the business is a family business. Frequently, when you see an entrepreneur, what they want to do is have their family get involved in the business for two reasons. The first reason is family will usually not demand high salaries or, in the beginning, they might not demand anything. They may do it as a labor of love. And the second thing is that family can be trusted. And this all works to an extent. But there's also important legal protections that have to be put in place. Even though it's a family business, it has to be treated professionally. That means there have to be contracts. There have to be employee manuals. There has to be policies and procedures. There have to be lines of authority. And that's important, not so much because people don't trust one another, it's more because businesses run better when everyone knows what they're doing and what's expected of them. Then there are less misunderstandings, less miscommunications. And so, again, this is one of those areas where the dynamic of the situation, the understanding of the psychology, if you will, of how this business is running, and who these people are, and how they're relating to one another, is just as important as the legalities themselves. And, in an interesting way, the legalities reflect those relationships. Our firm truly welcomes entrepreneurs who wish to start a business or have started their business and wish to expand. We are very eager to have those discussions and would welcome the opportunity to advise such clients if they need us.

Nonprofit Law Info Blog

Non-Profit Law[MUSIC PLAYING] One of the areas of law that we truly enjoy is the representation of nonprofits. In other words, charities. This involves not only forming charities, determining whether the charity will be a 501(c)(3), a 501(c)(4), or with respect to a house of worship, it might not even need to be either in order to be classified as a charity, to how the company that is in a nonprofit mode can maintain that mode. In other words, just because you obtain 501(c)(3 status doesn't mean that you keep it. You have to be vigilant. You have to understand that there are ways that the nonprofit must operate which really don't apply to a for profit company. Such things, for example, as executive compensation. The executive compensation has to be in a different model than a for profit company would necessarily have to have. In addition, there are issues relating to contracts, employment disputes, landlord tenant issues, all the panoply of legal matters that would apply to a for profit or a nonprofit company. But it's always informed by the fact that these nonprofits generally are underfunded, at least in the sense that they want to spend their money doing good for the world, as opposed to dealing with their lease or their vendors. And in addition, that there's always a sense that there is a mission here. An aspect of representing nonprofit entities that often arises comes out of the complications from the fact that most of these entities are primarily, if not entirely, staffed by volunteers. This presents some unique situations. First, the volunteer may not be so inclined to sign the normal documentation that you would ask an employee to sign. Some of the things that an entity needs to have in place to secure its rights and to make sure it's protected are the same as those of any other business. But a volunteer is not going to necessarily look as kindly towards signing those documents. It also means that you may have someone who's very passionate about the mission of the organization, but is not necessarily as motivated to adhere to the governance issues, or to hear what the attorney is saying in terms of the complications that could arise. Sometimes you also have some political strife or conflict between the volunteers and the paid staff, and how to address that from both a documentation point of view, but also the realities of resolving those disputes in a way that's amicable, considering that everyone is doing this for a purpose, for a mission, and how can you get both sides to be on the same page and drive that purpose. And so all of these issues we find to be absolutely fascinating and very meaningful. As a matter of fact, many of our attorneys have served and do serve on the boards of trustees for non-profits. So, in many ways, we find this area of law to be particularly meaningful. And we enjoy doing it. And we look forward to having a practice that incorporates this important aspect of commercial law.

Franchise Law Info Blog

Franchise Law[MUSIC PLAYING] Our firm handles a number of franchise law matters. This has become something of a cottage industry recently, simply because with the economic ups and downs, more and more people want to own their own businesses. Franchises are supposed to be turnkey operations. They're supposed to be situations in which you just walk in to a thriving business where all the major decisions have already been made in terms of how it's going to look, what the product is going to be, how it's going to be distributed and manufactured, how it's going to be presented to the public. And so it seems as if it's much easier and less complex than starting from scratch. But, as with everything involving legal matters, the devil is in the details. We have found that the franchise agreements that people are asked to sign are unusually complex, and surrender a plethora of rights that normally would not be surrendered when someone is starting a business. The truth is that franchises involve renting a business, in essence, using a business model rather than owning it. The way lawyers describe that is they describe it as licensing the intellectual property that is owned by the franchisor. And in addition to that, the franchisor has an unusual amount of involvement in very basic decisions, not just the placement of marketing for the product or the way the product will be sold to the public, but also such things as the lease for the property and whether the person will locate the franchise in one area or another. We can have a wonderful opportunity to start a franchise in a particular area, and suddenly that is undermined because the franchisor puts another franchise for the same product within proximity. And all of a sudden, something that looked great now is not so great. Well, there are certainly differences between operating a franchise and operating any other type of business. There's also a lot of similarities. Any of the issues that a business owner is going to have to address in terms of employment issues, leasing commercial real estate issues, intellectual property, IT services, that's all still going to need to be addressed by a franchisee. Sometimes it might be easier because of the relationship with the franchisor. Some of the services may already be packaged for them. But that can also make it more challenging. There's going to be compliance issues with that bulky franchise agreement that they are given, as well as complication if the package that they're being provided by the franchisor is not one that is suitable to them, or things are not working, and then overcoming the challenges of that aspect. But by and large, you'll see that there are a lot of similarities. So, all of the things that we recommend for general business owners are also going to be recommended for a franchisee. Another example of that would be that, certainly, even if a property is being operated as a franchise, it still needs to have its own corporate governance structure. The owners should still form an LLC or a corporation and enable itself to take advantage of the corporate liability shield for operating the business. All contracts that that business has, including the contract with the franchisor, should be through that entity. There is something inspiring about representing people who go out there and start their own businesses, start their franchises, work hard, and try to make a go of it. And we find that these relationships with these clients can be some of the most rewarding that we have.